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From Products Liability Law Daily, September 6, 2013

Claims against fish food manufacturer not preempted, but economic loss rule barred most damages

By John W. Scanlan, J.D.

An aquafarm’s claims against the manufacturer of fish feed were not preempted by federal law, a U.S. District Court for the District of Hawaii ruled (Keahole Point Fish LLC v. Skretting Canada Inc., September 4, 2013, Chang, K.). However, the economic loss rule barred recovery of damages on most of the aquafarm’s claims, leaving only claims for breaches of the implied warranty of merchantability and the implied warranty of fitness to proceed to trial.

Background. An aquafarm owned by Kona Blue asked Skretting Canada, a manufacturer of fish food, to prepare a custom diet for its Seriola rivoliana fish. The farm was offered four options that included fishmeal reductions, including one that substituted poultry meal for some fishmeal, which the aquafarm selected, and the manufacturer began supplying it to the fish aquafarm in December 2007. The aquafarm was acquired in February 2010 by Keahole Point Fish LLC. Keahole asserted that after it took control of the aquafarm, the manufacturer further reduced the level of fishmeal in the feed, with the replacement protein containing a lower level of taurine, resulting in poor eating, slower growth, increased infections, poor reaction to treatments, and higher mortality rates. The manufacturer asserted that the formula had not changed. In 2011, the manufacturer informed the aquafarm that the estimated taurine levels in its food was about 0.17 percent, but the aquafarm switched away from the manufacturer’s part-poultry feed to the high fishmeal feed, and two months later it switched to a competitor’s food.

Asserting that the health of the fish improved dramatically after the switch, the aquafarm brought negligence, intentional misrepresentation, negligent misrepresentation, products liability, implied warranty of merchantability, implied warranty of fitness, and unjust enrichment claims against the manufacturer. The manufacturer filed a breach of contract claim against the aquafarm and also moved for summary judgment on the aquafarm’s claims.

Preemption. The aquafarm’s negligence, products liability, and implied warranty claims were not preempted by the Federal Food, Drug, and Cosmetic Act (FDCA) because there was a material issue of fact as to whether the defendant could have manufactured fish food that included a sufficient amount of taurine without supplementing it. The FDCA presumes food additives are unsafe until their use is authorized by the Food and Drug Administration (FDA). FDA regulations regarding food additives provide that taurine is safe for use in animal feeds as long as it is added to complete feeds such that the total taurine content does not exceed 0.054 percent of the feed. In order for the claims to be preempted, the court stated that there would have to be indisputable evidence that the manufacturer could not provide a feed satisfying the aquafarm’s minimum taurine requirement without using supplementation because supplementation would violate the FDCA and FDA regulations.

The aquafarm produced test results of feed produced by the manufacturer and its competitor to show that the minimum taurine requirement could be met using naturally occurring taurine without resorting to supplementation, but the manufacturer stated that the test results showed that it would be impossible to do so without supplementation. Although the court noted that it might be difficult to produce consistently the feed with the required levels of taurine without supplementation, it reasoned that it could not be impossible because both the manufacturer and the competitor already had done so. Therefore, there was a material factual dispute on this issue that rendered summary judgment on these claims inappropriate.

Economic loss rule. However, the aquafarm’s claims for negligence, products liability, and negligent misrepresentation were barred by the economic loss rule. While an exception to the rule applies when a finished product causes damage to other property, the aquafarm did not seek to recover damages for physical injury to the fish, but based its theory of damages on a lost profits methodology and sought damages for lost revenue, actual feed cost incurred, and additional costs incurred, all of which constituted economic damages under Hawaii law. While the feed and fish are not part of an integrated system, the court based its decision on the aquafarm’s decision not to seek damages for injury to the fish as “other property.” However, the court observed that Hawaii courts have not applied the economic loss rule to intentional misrepresentation claims and declined to extend the rule to cover the aquafarm’s claim in this case (but dismissed it for other reasons).

Breach of implied warranties. Summary judgment was inappropriate for the aquafarm’s claims for breach of implied warranty of merchantability. Although the manufacturer had argued that this warranty did not apply because the feed was a custom product, so that usual standards for determining ordinary performance could not be calculated, the court noted that Hawaii courts had not adopted the custom product exception. Furthermore, the court found that the exception nevertheless would not apply because the feed at issue had not been created especially for Keahole Point, as it had been created two years earlier for Kona Blue and had been sold for over two years before Keahole Point acquired the aquafarm, which gave a basis for ascertaining standards for determining ordinary performance.

The court also declined to dismiss the aquafarm’s claim for breach of implied warranty of fitness for a particular purpose. The manufacturer’s disclaimer of this warranty, which appeared on its product sheets, was not conspicuous, and there was no dispute that the product sheets were not part of the contract between the aquafarm and the manufacturer. The evidence did not clearly show that the aquafarm’s president read and knew about the disclaimers at the time they entered the contract, and because exclusions are generally disfavored by law, the court concluded that there was insufficient evidence to find that the aquafarm was aware of the disclaimer. Furthermore, the president testified that the aquafarm had relied upon the manufacturer’s expertise in formulating fish feed to create a feed that was appropriate for the requirements of the Seriola rivoliana. Drawing all inferences in favor of the aquafarm, the court determined that there was a genuine question of fact on this issue.

The case number is 11-00675 KSC.

Attorneys: Brandon M. Segal (Alston Hunt Floyd & Ing) for Keahole Point Fish LLC. D. Matthew Doden (K&L Gates LLP), Patricia M. NaPier (Goodsill Anderson Quinn & Stifel LLLP) for Skretting Canada Inc. AKA Skretting North America.

Companies: Keahole Point Fish LLC; Skretting Canada Inc.

MainStory: TopStory PreemptionNews DamagesNews DesignManufacturingNews FoodBeveragesNews HawaiiNews

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